Q3 2021 LGI Homes Inc Earnings Call

November 2, 2021

[music].

Welcome to LG I homes third quarter 2021 conference call today's call is being recorded and a replay will be available on the company's website later today at Www Dot L. G I homes dotcom.

We have allocated an hour or prepared remarks, and Q&A if anyone should require operator assistance during the conference call. Please press star zero.

At this time I will turn the call over to John Schroeder, Vice President of Investor Relations at L. G I homes.

Yeah.

Thank you.

Good afternoon, and welcome to <unk> homes conference call to discuss our results for the third quarter and the nine months ended September 32021.

Today's call contains forward looking statements regarding our business strategy outlook plans objectives and updated guidance for 2021.

These statements, which speak only as of today's call and are based on management's expectations are not guarantees of future performance and are subject to risks and uncertainties.

You should review our filings with the SEC, including our risk factors and cautionary statement about forward looking statements sections for a discussion of the risks uncertainties and other factors that could cause our actual results to differ.

Differ materially from those anticipated in these forward looking statements.

<unk> assumes no obligation to publicly update or revise any forward looking statements.

Reconciliations of any non-GAAP financial measures discussed on today's call to the most comparable measures prepared in accordance with GAAP are included in the press release issued this morning and in our quarterly report on Form 10-Q for the quarter ended September 32021 that we expect to file with the SEC later today.

This filing will be accessible on the SEC's website and in the Investor Relations section of our company website.

Our hosts today are Eric Lieber, Chairman and Chief Executive Officer, and Charles <unk>, Chief Financial Officer, and Treasurer, I'll now turn the call over to Eric. Thanks, Josh Good afternoon, and welcome to our earnings call I'll start by sharing highlights of our third quarter before handing it off to Charles to provide more details on our final.

<unk> results.

Finally, I'll close with an update on our performance so far in the fourth quarter and discuss our updated guidance for the full year.

First I'd like to recognize that next week marks our eighth anniversary as a public company.

At the time of our IPO. Our goal is to grow the company by replicating our business model in new markets across the country.

Over the last eight years, we've grown our closings and revenues at annual rates up, 29% and 39% respectively Quad.

Quadrupled our community count delivered some of the industry's most attractive and consistent profitability metrics and have created significant value for our shareholders demonstrated by the 200% appreciation in our stock price.

Today, we're the 10th largest builder in the country with operations in 19 States and 35 markets.

After year, we've proven that our unique operating model is scalable and successful in every market we better.

Reflecting on these successes.

Most proud that we've maintained our people focused culture that rewards excellence and make homeownership attainable for families across the country.

I. Thank all of our employees for their hard work commitment to our customers' belief in our values and loyalty to our company.

It does have their dedication we have consistently achieved record setting results in the third quarter was no exception.

During the quarter, we set new company records for revenue closings and absorptions, despite ongoing supply chain challenges and a lower number of active communities.

Closings in the third quarter increased nearly 20% over last year to a record 2499 homes.

Combined with higher average sales prices. This drove a 41% increase in our revenue to a third quarter record of $752 million.

During the quarter nine of our 35 markets delivered double digit absorptions and we averaged a record eight one closings per community per month companywide.

Charlotte was our top market was $15 seven closings per community per month.

Second was San Antonio with $14, one followed by Austin with $13 six.

Atlanta, and Dallas Fort worth each achieved 10, eight closings per community per month.

We remain focused on our core value of exceptional customer service by honoring the commitments made to our buyers and held fast to our goal of keeping homeownership attainable without sacrificing our margins despite.

Recent cost pressures, we delivered gross margin of 26, 9% and adjusted gross margin of 28, 2%, our best third quarter performance since 2014.

Finally, our SG&A expense ratio reached an all time, new low which helped drive net income to a third quarter record of $101 million.

Global supply chain disruptions have extended construction and development cycle times across our markets.

I am grateful to our construction and purchasing teams who work closely with suppliers and trade partners to manage these headwinds and limit their impact to our customers.

Our 100% spec focused model is a strong advantage in the current environment.

We pre select the fit and finishes of our homes, enabling us to quickly pivot between suppliers and even substitute alternatives skus to heat construction moving forward.

While these challenges are expected to continue we believe our people and unique operating model position us to deliver homes at a pace in line with achieving our full year closing guidance.

Throughout the quarter, we continued to work through the large backlog, we built early in the year and to release new homes for sale. Once we had visibility on construction times and costs.

As we projected on our last call the slower pacing of sales combined with last year's strong order comp result in the 78% decline in net orders in the third quarter on.

On a year to date basis, the decline was two 8%.

Further declines in order growth are expected as we convert our remaining backlog and continue to compare results to all time high comps in the fourth quarter of last year and the first quarter of 2021 wells.

We will continue to manage our sales pace with the goal of bringing the size of our backlog and our customers time and are back to normal levels.

Demand continues to outpace supply and in many communities, we continue to sell out of homes as soon as we release them due to existing weightless. However.

However, we are seeing signs that demand levels are normalizing from the surge that began last year.

While price increases are certainly playing a role in moderating demand. We don't think it's the primary driver as overall affordability continues to be supported by low interest rates.

Instead, we believe that the industry is slowly working through the earlier demand surge and that as these homes deliver we should return to a normalized demand environment driven by healthy long term growth fundamentals.

During the quarter, we made significant investments in land and lots to meet that demand in the years to come.

Last quarter, we acquired over 14000 lots and increased our total lot position to nearly 88000, while maintaining our disciplined underwriting criteria and what we consider to be normalized absorptions assumptions positioning us well for our future growth with that I'll turn the call over to Charles for more details on our.

Financial results.

Thanks, Eric.

Our revenue in the third quarter increased 47% year over year to a record $752 million.

We closed 2499 homes, a 19, 5% increased year over year.

These closings included 433 homes sold through our wholesale business, representing 17, 3% of our total closings compared to 92 homes or four 4% of our total closings in the same quarter last year.

Our average sales price increased 17, 7% over the same period last year, and eight 5% sequentially to a record $300764.

Price increases were driven by a favorable demand environment that allowed us to pass through costs in.

Increased closings in certain markets with higher price points, particularly in the northwest, partially offset by higher percentage of wholesale closings.

Gross margin as a percentage of revenue this quarter was 26, 9% compared to 25, 3% during the same period last year.

This 160 basis point improvement resulted from our success passing through cost increases lower capitalized interest expense and continued operating leverage partially offset by higher lot costs and a larger percentage of wholesale closings.

Excluding wholesale gross margin was up over 260 basis points year over year and.

And given our performance to date, we're tightening our gross margin guidance by 50 basis points to a range of 26, 5% to 27, 5%.

Our adjusted gross margin as a percentage of revenue this quarter was 28, 2%.

Compared to 27, 3% for the same quarter last year, a 90 basis point improvement.

Adjusted gross margin excludes approximately $8 $6 million of capitalized interest charged to cost of sales during the quarter.

$1 million related to purchase accounting together, representing 130 basis points.

Similar to gross margin, we are tightening our adjusted gross margin guidance by 50 basis points to a range of 28% to 29%.

Combined selling general and administrative expenses for the third quarter were eight 6% of revenue compared to 10, 8%. During the same period last year, representing an improvement of 220 basis points year over year. This.

This was the lowest SG&A expense ratio in our history further highlighting the continued strength of demand across our markets.

Selling expenses for the quarter were $39 9 million or five 3% of revenue compared to $35 5 million or six 6% of revenue for the third quarter of 2020.

The 130 basis point improvement was primarily related to operating leverage realized from the increase in revenue.

General and administrative expenses totaled $24 5 million or three 3% of revenue compared to four 2% for the same quarter last year.

The 90 basis point improvement was primarily driven by operating leverage resulting from higher revenue increased absorptions and a larger percentage of wholesale closings.

As a result of our performance to date, we are maintaining our SG&A expense guidance in the range between nine and nine 5%.

EBITDA for the quarter was $135 9 million or 18, 1% of revenue a 180 basis point improvement over the same period last year.

Adjusted EBITDA for the quarter was $147 8 million or.

Or 19, 7% of revenue a 320 basis point improvement over the same period last year.

Adjusted EBITDA excludes approximately $13 $3 million related to the redemption premium debt issuance costs and discount previously capitalized associated with our 2026 senior notes and $1 million related to purchase accounting together, representing approximately 160 basis.

Since.

Pre tax net income for the quarter was $127 million or 16, 9% of revenue a 230 basis point improvement over the third quarter of 2020.

Our effective tax rate in the third quarter was 28% the.

The year over year increase in our effective tax rate was due to the retroactive federal energy efficient homes tax credit we recognized in the third quarter of last year.

Given our performance to date, we are tightening our effective tax rate guidance for the full year by 50 basis points to range between 20 and 21%.

Our third quarter reported net income increased 13% year over year to $106 million or 13, 4% of revenue in our third quarter earnings were $4 <unk> per basic share and $4 <unk> per diluted share.

Excluding charges related to debt extinguishment net income in the third quarter would have been $111 1 million and earnings would have been $4 53 per basic share and $4 48 per diluted share.

Third quarter gross orders were 1389, a decrease of 68, 2% and net orders were 790 million a decrease of 77, 7% year over year.

Reiterating Eric's earlier comments the recent decline in our orders as a function of sales pacing a desire to limit our buyers' time in backlog and a record third quarter comp last year.

Our cancellation rate for the third quarter was 43, 1% and this was expected as we released fewer new homes for sale to compensate for cancellations that occurred in our backlog and we would expect this trend to continue as we pace our sales and work through our backlog.

We finished the third quarter with a backlog of 3090 homes, representing a decrease of 13, 7% year over year.

The value of our backlog on September 30 was approximately $1 billion, an increase of two 9% year over year.

We continue to make significant progress acquiring land to support our long term growth objectives and finished the quarter with our strongest land position ever.

As of September 30th.

And our land portfolio consisted of 87512 owned and controlled lots.

53% year over year increase and a 15, 3% increase sequentially.

We added almost 4200, new lots to our owned inventory and ended the quarter with 44174 owned lots an increase of 35, 4% year over year and 4% sequentially.

7342 of our own lots were finished vacant lots and 32250 were either raw land or land under development.

During the quarter, we started over 'twenty 300 homes and as of September 30, with 4582 completed homes information centers or homes in process.

Excluding our information centers only 456 of these homes were complete <expletive>.

A decline of 55, 8% compared to the 1031 completed homes at the end of the third quarter last year.

Finally, we had 43338 controlled lots at quarter end, an increase of 76, 5% year over year and 29, 7% sequentially.

Turning to the balance sheet, we ended the quarter with approximately $47 million in cash compared to $112 million last quarter.

Our higher cash balance last quarter was attributable to excess proceeds from the issuance of our new 2029 senior notes after giving effect to the temporary pay down of our revolving credit facility.

During the quarter, we used amounts available on our credit facility to redeem all of our outstanding 2026 senior notes and as a result, we recognized a $10 $3 million early redemption expense and expense $3 million of deferred financing costs and discounts that were previously being amortized in association with the notes.

The completion of this refinancing successfully extends our debt maturity by three years to 2029 and saves $8 $6 million per year in interest expense.

At the end of September we had approximately $666 million in combined total debt outstanding under our revolving credit facility and our 2029 senior notes.

Our available borrowing capacity under our credit facility was approximately $460 million.

Including cash on hand, we ended the quarter with total liquidity of $506 $3 million.

Our net debt to capitalization ratio was 31, 7% compared to 36, 1% at the same time last year.

And last year, our shareholders' equity has increased by over $323 million to more than $1 3 billion.

Additionally, as a result of our strong operating results and profitability. We delivered a return on equity of 38, 7% for the 12 month period ended September 30th.

During the third quarter, we repurchased 358817 shares of our common stock for $56 $1 million.

And since 2018, we have repurchased nearly one 7 million shares of our common stock.

As of September 30, there were $24 3 million shares outstanding and $162 $7 million remaining on our existing stock repurchase program.

We expect to continue the systematic and opportunistic share reductions as a component of our broader capital allocation priorities.

At this point I'll turn the call back over to Eric.

Thanks, Charles our strong performance has continued into the fourth quarter subject to review and verification of fundings, we expect to send out a press release tomorrow, formerly announcing that in line with our expectations. We closed approximately 725 homes in October.

Moving to our updated full year guidance, we now expect to end the year with fewer communities than we guided to last quarter.

Elevated absorptions have caused communities close out earlier than planned and supply shortages have extended development timelines as a result, we now expect to end the year with 100 to 105 active communities. We continue to model flat to slightly up community count in 2022.

With the expectation of a considerable increase in our community thereafter.

Despite a lower community count expectation this year, our closing guidance is unchanged. Thanks to the phenomenal work or construction and purchasing teams are doing every day to manage the supply chain challenges.

Year to date closings through October indicate that we remain on pace to deliver between 10000 and 10500 homes. This year. Similarly, our average sales price guidance of 285 to $295000 for the full year is unchanged.

As Charles noted we are tightening our gross margin guidance to a range of $26 five to 27, 5% and our adjusted gross margin to a range of 28% to 29%.

The third quarter, Mark our fourth consecutive quarter of single digit SG&A expense as we benefit from higher closings and average sales prices.

Given our performance to date, we are maintaining our SG&A guidance in a range between nine and nine 5% and now expect an effective full year tax rate between 20 and 21%.

I'll say again, how pleased we are with our results for the last eight years, we've repeatedly set records and last quarter was no exception with new third quarter highs and closings absorptions and revenue.

Despite industry wide challenges, we have maintained our strategy of going deeper in our existing markets and expanding to select new markets as we pursue the goal of doubling our community count.

Based on our impressive results to date are strong balance sheet and attractive land pipeline. We believe we're extremely well positioned to deliver on all of our expectations. This year and for many years to come we will now open the call for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from Jay Mccanless with Wedbush You May proceed with your question.

Hey, good afternoon. Thanks for taking my questions. The first one Eric could you. Please repeat what you said about community growth for 'twenty two.

Yes.

Herculean decal for 'twenty, two Jay we said flat to slightly up last quarter. We said similar about since we revised down now, we're saying flat to slightly up for 'twenty, two and then a considerable increase in community count in 2003.

Great.

And then.

On the cancellation rate, 43% versus I think it was 19% last year.

As part of the <unk>.

Rate driven or as part of this you guys canceling out some people who you think might not qualify once the home is ready maybe some more color around that.

Yes, it's really neither of those Jay its really just the orders. They just a math equation because we didn't have RMA orders going through this quarters. We're limited on inventory to sell the cancellation percentage was just a lot bigger number but now we're honoring all the contracts the customers. We sold the first quarter that are coming through.

Even though we didn't build enough of inflation and a lot of cases.

Upholding our core values of integrity, and if we told the customer I'll sell my house, we're going to deliver that house to them at that price.

So our cancellation rate is really just attributable to lack of orders and thats attributable to not having a lot of inventory to sell and make sure we're providing good service to our customers.

Okay, great. Thanks for taking my questions.

Welcome. Thank you.

Thank you. Our next question comes from Carl Reichardt with <unk>. You May proceed with your question.

Thanks, Hey, everybody.

I wanted to ask about the lot supply at 88000, and I think Charles you said 7300, or so finished vacant if you look at that 88000, you've got under control can you tell us what percentage of that is associated with currently open communities and then what percentages associated with what you would expect to bring to market in 'twenty two and 'twenty.

Three and beyond.

Yes.

Thanks, Karl Yes, it's a great question.

Don't have necessarily that level of detail handy, but what we can say right above the 88000 about half of them are controlled and consistent with what we've been talking about in the last couple of quarters. The vast majority of those controlled lots are raw land deals.

So.

Piggybacking off of <unk> comment about 23 and 2024. So we're just not seeing a lot of finished lot deals in our pipeline and so we're focused on buying raw land, putting that into our development pipeline and getting those ready to deliver and as communities in 2023 or 2024.

Sure.

Okay, so that makes sense.

Youre going to do the vast majority of self developed not finished lot option contracts and that's been the way we've operated profile okay.

And then.

And that comment about pricing and normalization I'm curious if given the number of closings you had to the wholesale channel.

Youre seeing similar levels of price resistance from that customer.

This is Eric Great question.

<unk> described the wholesale business is extremely strong right now theres a whole lot of capital.

Into that space and demand.

It is extremely robust.

Have very little inventory to sell the investors. So we've been very pleased with the percentage. This year, we're going to end up it's going to be probably 15% of our closings after coming off 17% last quarter and were up 14, 5% year to date. So I would describe the wholesale businesses demand still being very strong.

Even at today's pricing.

From a price resistant standpoint, you don't sense, you are seeing a similar dynamic to what youre seeing in the consumer channel.

Not as much now that that is correct. Okay. Great. Thanks, a lot I appreciate it.

Thanks, Matt.

Thank you. Our next question comes from Truman Patterson with Wolfe Research you May proceed with your question.

Hey, good afternoon, everyone. Thanks for taking my questions.

First you all are clearly doing a lot of development work, we've been hearing of continued.

Continued delays or shortages on the on the Muni and <unk>.

Horizontal development side.

Last quarter I believe you all mentioned that the.

The time that you buy a raw piece of land.

Currently converted into closings was kind of 24 to 36 months I was just hoping you could give an update there.

And what's happened over the past three to six months.

Yes, it's tremendous there I can start yes, im not sure if that has changed much in the last quarter and certainly that timelines not yet named quicker it depends on the market. It depends on how much engineering spend done on this specific track, but 24 to 30 months is certainly is a good average.

<unk> for the time, it's taken to bio pizza raw land and turning that into sales construction and closing so it's we're not going to impact any raw land deal. We buy it won't have an impact on 'twenty. Two 'twenty three closings is now 2024 and 2025 impact.

Okay. Okay, and then just a housekeeping question on the 22 community count that you expect to be flattish to slightly up.

Is that based on your more traditional kind of six 5% to seven per month absorption pace.

Or does that.

Assume an elevated we'll call it a per month that we're seeing in 'twenty one.

Now that would be forecasting more six five to seven more normalized.

18, 19, and 20 absorptions pace, which is still very strong, but but nothing like this year.

Okay, Okay, and then final one.

For me.

You all are have returned to the 100% spec strategy.

Could you just discuss what sort of spec build you were able to drive during the quarter I believe in the prepared remarks, you said 456.

Completed specs.

I'm trying to just balance this going forward because your third quarter absorptions based on orders were two.

Two and a half.

Per month range.

Yeah. Truman this is Charles I mean, we.

We started just over 2300 homes in the third quarter and I think we've always been 100% spec. It's just the demand has been strong and the backlog has been so strong from the early part of the year, but 'twenty 300 starts for the quarter and only 456 completed at the end of the quarters.

About half of what we had at the end of September last year.

Yes, sorry, let me clarify versus pre sale earlier in the year switching to selling a little bit later.

Okay. Thank you all for your time I appreciate it.

Thanks, Jeremy.

Thank you. Our next question comes from Michael Rehaut with Jpmorgan. You May proceed with your question.

Hi, This is Maggie on for Mike.

First question just on the price increases.

I believe you said Dave.

So we're still being used moderate demand.

I was wondering if you could.

Can you give us idea at the level of price increase that you saw during the quarter and how youre thinking about the potential for future increases over the next quarter or two.

Yes, Matt This is Eric I guess are great question.

Having our ASC over 300000 for a quarter is driven by demand, but also driven by cost have been elevated over the last quarter or two so we had to increase our prices substantially.

Because all the costs are up whether it's lumber.

Now all of the cost of construction, whether it's fees.

On the development side, obviously land is increasing in all of the development costs are increasing as well.

So we have seen some moderation in cost on the construction side lumber has come down but other costs of increase so we are projecting asps to be very similar in Q4, that's why our guidance remained unchanged.

But I think the higher cost environment is going to be here for a while.

Got it.

Thank you and then second just on the wholesale part of the business I believe you said that you're expecting to end up at about 15%.

Closings.

This year.

As you look forward over the next couple of years could you talk about kind of how you think.

The wholesale business for your part of your <unk>.

For all business and kind of if you have me.

Target or where you think that might go.

Yes.

Not ready to give guidance for 2022 on the wholesale business, yet and we're working through our pipeline of getting our contracts close for year 2021, we're.

We're going to start looking over the next quarter or two available inventory for 2022, we're confident that demand will be there. We think it's been a very accretive part of our business year. This year as it evidenced by we thought it was me 10% to 15% we're going to end up at the high end of the range.

Yes, I think amplifying the demand Thats thats in place. So we'll go back to everybody on 22 or 23, but we think the demand will be there for it to be still a good part of our business and very accretive to our shareholders.

Got it thank you.

Thank you. Our next question comes from Stephen Kim with Evercore. You May proceed with your question.

Hey, Thanks, guys. This is actually Brian on for Steve So orders were down significantly on a year over year basis, but the number of orders themselves was well below the level of starts you. Just mentioned you did during the quarter. We've been doing some analysis on how oversold the builders broadly have gotten during the past few quarter.

<unk>.

It looks to us as though you guys were significantly oversold say back in <unk> 'twenty, one putting these past two quarters, you've slowed your orders and in doing so almost completely reverse that condition. So I guess my question is are you now positioned.

Positioned well to lift sales restrictions in the near future and possibly return to a more normal level of sales absorptions next quarter.

Yes, it's a great question, Brian This is Eric.

And I think another way to look at it is we've got 7900 closing 707916 through Q3, we've got just over 3000 homes in the backlog and the vast majority of those are scheduled to close in Q4. So we don't have a lot of available inventory to sell sale.

We're just now starting to sell January and February deliveries, because we are operating in an environment, where we're not going to put a house for sale unless we know the cost because we've been dealing with such an inflationary environment and we don't know the cost until we start construction of the house for certain and then also providing exceptional customer.

Service to our customers, we want to make sure. We are confident in the closing dates and that also doesn't happen until the houses started construction. So the houses we are starting in November that are going to deliver in January February March of next year. We're just starting to put those on the price list. So our orders for Q4.

We believe we're going to be down a similar percentage to Q3 in that 70% to 80% because we have nothing to sell and then the first quarter should get back to normalized order environment now, it's a very tough comp because the first quarter of last year was orders were the best in homebuilding history practically for all of us.

So is really really strong, but first quarter, we will get back to normalized inventory and orders for us.

Okay got it thanks, that's really helpful color there.

And then my second one changing gears here is on the topic of supply chain disruptions, we've heard tales.

From some of the other builders sending workers across across state borders to pick up paint or shipping site and from one job site to another and I guess I'm wondering if your three key reported margins and or your projections for <unk> include any negative impact from the supply chain disruptions.

So are you guys able to quantify that impact.

Yes, I think the biggest impact on supply chain is just the construction timeline and our construction timeline is run in on average about 30 days longer.

Then it was kind of pre pandemic or pre this year. So I think thats the biggest disruption more than costs certainly costs are elevated but under the example that that youre using I don't think we're doing a lot of that in the field as far as getting different supplies from out of market or across.

State lines.

And then our gross margin. What you described is right on track for the third quarter and fourth quarter and our annual guidance, having adjusted gross margin in.

And the 28.

Very strong and stronger than historical and right, where we want to be.

I guess one more.

<unk>. If this was already brought up but and this is probably peak lumber costs that youre working through here in <unk> primarily right.

Correct, Yes, our peak lumber cost was three or four months ago. Our start so it's coming here from closings.

September October right now that's going to come through our financials. Okay. Awesome. Thanks, a lot guys I'll pass it on.

Youre welcome. Thank you.

Thank you. Our next question comes from Ken <unk> with Keybanc you May proceed with your question.

Hello, everybody.

Good evening again.

Checking on my Mic.

I might've missed it but did you guys lay out the actual inventory units I think it was $47 48 last quarter.

We did 4582 total units.

We had 456 completed about 4000 with so our web numbers about the same as it was last year with the completed units being down.

Yeah Yeah.

The reason I ask is I mean, essentially close right inventory Thats. What you are starting so the number that you highlighted for starts.

One is as you guys.

Talk about normalization I think youre, saying.

Inventory should normalize.

First quarter second quarter just conceptually.

What.

Are you guys actually targeting just a certain rate there because.

And I know you guys focus on closing the orders, obviously as Youre just outputs, but.

What are the governors that youre seeing I mean, if you look back to 16, I mean, obviously, you've grown a lot here and a lot of regions. There is a lot of different factors.

Underwriting trend analysis, but you guys were doing 6% and 16.

In 2017 back to 718.

At 8% and 18, I mean is there actually a natural cadence that you are targeting there when you think about your communities or is it better.

About.

Texas, where you have been you have extraordinary.

Pace because of the communities are larger and the northwest, which where you cited strong gross margins. It's.

They are a little smaller so it's a little different could you kind of walk us through what you think variants.

Variances are there that are.

Causing that.

No.

Thought about your normalization next year.

Sure No. It's a great question, Ken and I think our philosophy on inventory management is the same which is we like to see around four to six months inventory at any one point in time, so to build pace of 10000, a year you would expect to see somewhere around 5000 units. So we're coming in at 4600 roughly.

<unk> total.

As close to where we want to be the difference I think and what we're highlighting is is that the shift is into just a little heavy in with so we're delivering the houses and closing with the customers very quickly, which is very good for inventory turnovers and cash flow.

So we're being very efficient so I think normalization, what you would see as maybe the total units don't necessarily change by much but it's more of a shift to 60 40 with to complete or more of a 50 50 type of <unk>.

Arrangement, rather than the vast majority of just being in width.

Okay.

Right, Yes, because your closing guidance you just have half of what you have under construction right I mean, it's not.

Bad at all.

Last question for your inventory of $1 9 billion do you have that broken out for within land or is that something that just comes out in the.

The Q.

It comes out in the footnote in the 10-Q.

Yes, do you happen to have kind of.

Directional breakout right now.

Do I have got that for you. So in land land under development and finished lots was about $1 2 billion.

And we had $580 million and homes in progress and about $88 million and completed homes with the balance being an information centers.

Great.

Thank you guys very much.

Yes.

Yeah.

Thank you. Our next question comes from Deepa Raghavan with Wells Fargo Securities. You May proceed with your question.

Hi, good afternoon, everyone.

Two quick questions for me.

One can you talk to your gross margin expectations into 2022.

Would that be similar or should we expect better because you just mentioned you peek lumbar this quarter next quarter, which means a lot more starts to benefit next year, but then we have the backlog closing cadence.

Supply chain delays that may or may not hold how do we think about margins into 2022.

Yes, David This is Eric I can start.

We're not ready to give <unk> guidance for margins, yet, but that being said if you look at our historical gross margins and how we buy.

We do a lot of development. So when we underwrite a piece of property we are buying.

We underwrite that to an adjusted gross margin of 25% to 28%.

And historically that is what we have produced the wholesale business brings that down slightly and this year I described as a very strong gross margin range and including wholesale we're likely to end of the year above our historical averages next year more consistency in gross margin and we expect adjusted gross margin to be between <unk>.

95% and 28%.

For the future because thats, how we buy deals and Thats, our expectation and we've been very good about producing those type of results. So similar to historical results for gross margin. So that's what we always expect.

Okay, that's fair.

Can you talk to your lot sizes.

The amount of lots per community and thats been increasing or staying the same.

A lot.

Obviously increased a lot so it looks like none of these are fencing, even into 2022, we're calling for everything to benefit 2020 and beyond.

So just curious.

Is it the same number of lots per community on that rich.

Yes, I think directionally, it's probably higher just because the blend of finished lot developments or finished lot take down development buying from a developer compared to last that we self develop.

The percentage is increasing towards more and more self development.

And those tend to be larger I don't have those and I'll, let Charles at the exact numbers in front of us, but directionally, they're larger land positions.

Alright, I'll pass it on thanks very much good luck.

Alright, thank you.

Thank you. Our next question comes from Alex Barron with housing Research Center. You May proceed with your question.

Thanks, gentlemen.

Good afternoon.

I was hoping you could give us the starts number for year to date and also for last year's quarter, just to get a sense of how this quarter compares to 2300.

Just flipping here out to see if I have it handy.

Sure.

Which do not unfortunately.

Go ahead.

I would say if I can get back to you here.

Okay great.

Yes. The other question is I was wondering if you guys feel like there's been any change in the mix of buyers that you guys are seeing obviously theres a lot of <unk>.

Talk with people coming in from.

Other states.

Theres been baby Boomers, who all of a sudden are buying houses are you guys seeing the change in any change in the mix of your buyers versus what you traditionally saw.

That's question one the other question is you guys are doing these land development deals for 2023.

Do you expect that the prices are going to be similar or the size of the homes are going to be similar to what youre doing now or are you going to seek to do something to make their homes more affordable price point wise by 2023.

Okay. Good questions. Alex This is Eric I can start with Charles is looking up those numbers.

First of all our buyers I point to a couple of things. One is we've got our highest average sales price in history rates have basically been the same for the last year or two.

So that means our monthly payments are higher so the quality of our buyers as measured by the amount of money, they're making in their credit is the fastest ever been our average credit score last quarter was 711 of our buyers historically thats been a number has been between $6 50, and 680 <unk>, we're seeing average credit scores and our quality.

Income and credit wise for our buyers is increasing.

Direct proportion to the average sales price, increasing and we're seeing more investor activity not only on the wholesale side, but the demand high investor some of the community and purchasing our houses that's more elevated than it has been in the past.

As far as the development goes you know affordability is always important to LTI. So we're continuously on these larger land plans.

Looking for density more more loss per acre is important to us.

And then it really just.

For the assumptions going forward on affordability house cost is really going to drive it.

The deals were buying from a land standpoint, not a surprise a one land is more expensive than it was two years ago. Currently it's more expensive to develop land than it was two years ago or even last year. So it really depends on warehouse costs.

We believe maybe not off its peak for three or four months ago, but we believe labor.

Labor materials fees doing business in the city is going to continue to get more expensive just as that's how it's been historically since we've been operating as a public company.

Okay, Thanks, and best of luck.

Alex you've got Ive got those numbers for you here, we've started roughly about 8500 total for the year with 3200 starts in the second quarter. This year.

Thanks, so much.

Yes, you bet.

Thank you at this time I am not showing any further questions.

Alright, thanks, everybody for participating on today's call for your continued interest in <unk> homes have a great day and go Astros.

Thank you. This concludes LTI homes third quarter 2021 conference call have a great day.

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Welcome to LG I homes third quarter 2021 conference call today's call is being recorded and a replay will be available on the company's website later today at Www Dot L. G I homes dotcom.

Allocated an hour for prepared remarks, and Q&A if anyone should require operator assistance during the conference call. Please press Star zero.

At this time I will turn the call over to John Schroeder, Vice President of Investor Relations at Agi homes.

Thank you good.

Good afternoon, and welcome to LTI homes conference call to discuss our results for the third quarter and the nine months ended September 32021.

Today's call contains forward looking statements regarding our business strategy outlook plans objectives and updated guidance for 2021.

These statements, which speak only as of today's call and are based on management's expectations are not guarantees of future performance and are subject to risks and uncertainties.

You should review our filings with the SEC, including our risk factors and cautionary statements about forward looking statements sections for a discussion of the risks uncertainties and other factors that could cause our actual results to differ materially from those anticipated in these forward looking statements.

<unk> homes assumes no obligation to publicly update or revise any forward looking statements.

This filing will be accessible on the secs website and in the Investor Relations section of our company website.

<unk> results.

Finally, I'll close with an update on our performance so far in the fourth quarter and discuss our updated guidance for the full year.

First I'd like to recognize the next week marks our eighth anniversary as a public company at the time of our IPO. Our goal is to grow the company by replicating our business model and new markets across the country.

Over the last eight years, we've grown our closings and revenues at annual rates up 29% and 39% respectively.

Today, we're the 10th largest builder in the country with operations in 19 States and 35 markets.

Year after year, we've proven that our unique operating model is scalable and successful in every market we better.

Reflecting on these successes.

Most proud that we've maintained our people focused culture that rewards excellence and make homeownership attainable for families across the country.

I. Thank all of our employees for their hard work commitment to our customers' belief in our values and loyalty to our company.

Does have their dedication we have consistently achieved record setting results in the third quarter was no exception.

During the quarter, we set new company records for revenue closings and absorptions, despite ongoing supply chain challenges and a lower number of active communities.

Closings in the third quarter increased nearly 20% over last year to a record 2499 homes.

Combined with higher average sales prices. This drove a 41% increase in our revenue to a third quarter record of $752 million.

During the quarter nine of our 35 markets delivered double digit absorptions and we averaged a record eight one closings per community per month companywide.

Charlotte was our top market was $15 seven closings per community per month.

Second was San Antonio with $14, one followed by Austin with $13 six.

Atlanta, and Dallas Fort worth each achieved 10, eight closings per community per month.

Despite recent cost pressures, we delivered gross margin of 26, 9% and adjusted gross margin of 28, 2%, our best third quarter performance since 2014.

Finally, our SG&A expense ratio reached an all time, new low which helped drive net income to a third quarter record of $101 million.

Global supply chain disruptions have extended construction and development cycle times across our markets I am.

Great ball to our construction and purchasing teams who work closely with suppliers and trade partners to manage these headwinds and limit their impact to our customers.

Our 100% spec focused model is a strong advantage in the current environment.

We pre select the fit and finishes of our homes, enabling us to quickly pivot between suppliers and even substitute alternatives skus to heat construction moving forward.

While these challenges are expected to continue we believe our people and unique operating model position us to deliver homes at a pace in line with achieving our full year closing guidance.

Throughout the quarter, we continue to work through the large backlog, we built early in the year and to relate new homes for sale. Once we had visibility on construction times and costs.

As we projected on our last call the slower pacing of sales combined with last year's strong order comp, resulting in a 78% decline in net orders in the third quarter on.

On a year to date basis, the decline was two 8%.

We will continue to manage our sales base with the goal of bringing the size of our backlog and our customers time and are back to normal levels.

Demand continues to outpace supply and in many communities. We continue to sell out of homes as soon as we release them new to existing Waitlists. However.

However, we are seeing signs that demand levels are normalizing from the surge that began last year.

While price increases are certainly playing a role in moderating demand. We don't think is the primary driver as overall affordability continues to be supported by low interest rates.

During the quarter, we made significant investments in land and lots to meet that demand in the years to come.

Last quarter, we acquired over 14000 lots and increased our total lot position to nearly 88000, while maintaining our disciplined underwriting criteria at what we consider to be normalized absorption assumptions positioning us well for our future growth with that I'll turn the call over to Charles for more details on our.

Financial results.

Thanks, Eric.

Our revenue in the third quarter increased 47% year over year to a record $752 million.

We closed 2499 homes, a 19, 5% increased year over year.

These closings included 433 homes sold through our wholesale business, representing 17, 3% of our total closings compared to 92 homes or four 4% of our total closings in the same quarter last year.

Our average sales price increased 17, 7% over the same period last year, and eight 5% sequentially to a record $300764.

Price increases were driven by a favorable demand environment that allowed us to pass through costs increased closings in certain markets with higher price points, particularly in the northwest partially offset by higher percentage of wholesale closings.

Gross margin as a percentage of revenue this quarter was 26, 9% compared to 25, 3% during the same period last year.

Excluding wholesale gross margin was up over 260 basis points year over year and.

And given our performance to date, we're tightening our gross margin guidance by 50 basis points to a range of 26, 5% to 27, 5%.

Our adjusted gross margin as a percentage of revenue this quarter was 28, 2%.

Compared to 27, 3% for the same quarter last year, a 90 basis point improvement.

Adjusted gross margin excludes approximately $8 6 million of capitalized interest charged to cost of sales during the quarter.